Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

The correlation between a firm’s size and its productivity level varies considerably across OECD countries,
suggesting that some countries are more successful at channelling resources to high productivity firms than
others. Accordingly, we examine the extent to which regulations affecting product, labour and credit
markets influence productivity, via their effect on the efficiency of resource allocation. Our results suggest
that there is an economically and statistically robust negative relationship between policy-induced frictions
and productivity, though the specific channel depends on the policy considered. In the case of employment
protection legislation, product market regulations (including barriers to entry and bankruptcy legislation)
and restrictions on foreign direct investment, this is largely traceable to the worsening of allocative
efficiency (i.e. a lower correspondence between a firm’s size and its productivity level). By contrast,
financial market under-development tends to be associated with a higher fraction of low productivity
relative to high productivity firms. Furthermore, stringent regulations are more disruptive to resource
allocation in more innovative sectors, though the nature of innovation turns out to be important.